Black Monday is a term that refers to the three distinct stock market crashes that, by coincidence, all occurred on Mondays. These crashes took place on October 19, 1987, October 28, 1929, and August 24, 2015. Among these, the 1987 crash is the most commonly associated with the phrase “Black Monday.”
The 1987 Black Monday stands out as the most severe single-day percentage decline in stock market history. On that fateful day, October 19, 1987, the Dow Jones Industrial Average experienced a staggering 22.61% drop, plummeting 508 points to close at 1738.74. Simultaneously, the S&P 500 index fell by 57.64 points, ending at 225.06, which represented a 20.4% loss. The magnitude of this decline was so significant that it took the Dow Jones two years to recover from the losses incurred on that single day.
The events leading up to this crash began with a five-year bull market. In 1987 alone, the Dow Jones had surged by 43%, reaching a peak of 2,747.65 on August 25, 1987. The market maintained a slightly lower range for about a month until October 2, at which point it began a steep decline. In the two weeks preceding Black Monday, the markets had already fallen by 15%.
Various studies were conducted to determine the cause of this nearly 37% market drop over two weeks. The Securities and Exchange Commission (SEC) analysis concluded that traders’ anxiety about anti-takeover legislation being reviewed by the House Ways and Means Committee was a significant factor.
This bill was introduced on Tuesday, October 13, and passed on October 15. In just three days, stocks tumbled over 10%, marking the most substantial three-day decline in the markets in 50 years. The securities that experienced the steepest declines were those of corporations that would have been most affected by the legislation’s impact.
The proposed bill aimed to eliminate a tax deduction on corporate takeover loans, as part of Congress’s efforts to better regulate the markets. Wall Street’s reaction to this proposal manifested in the Black Monday crash. Ironically, the controversial tax deduction provision was removed from the bill before it became law, but only after the stock market damage had already occurred.
Several other factors exacerbated the crash. Computerized stock trading programs, which were already in use at the time, contributed to the severity of the sell-off. These programs were configured with sell stop-loss orders that triggered sell orders when the markets declined by a specific percentage. As these programs began to react simultaneously, the New York Stock Exchange dealers were overwhelmed, leading to a shortage of buyers for some stocks and forcing a halt in trading on the exchange.
Additionally, an announcement made on October 16 by then-Treasury Secretary James Baker unsettled the markets. Baker stated that the U.S. might allow the dollar’s value to fall, which would have resulted in lower stock prices for foreign investors. Consequently, many foreign investors decided to sell their holdings with the intention of buying back in after the dollar’s decline. Baker’s statement was an attempt to address the concerning increase in the U.S. trade deficit.
Many investors, economists, and observers feared that this devastating crash would lead to a recession. However, the Federal Reserve managed to avert this outcome by injecting money into banks, which helped stabilize the markets and led to a partial recovery. By the end of October, the Dow had rebounded by 15%. For the remainder of the year, the Dow traded within a narrower range between 1,776 and 2,014, continuing into 1988.
Although Black Monday did not directly cause a recession, it did serve as a precursor to the Savings and Loan Crisis of 1989 and the subsequent recession of 1990-1991. The events of Black Monday and its aftermath demonstrated the interconnectedness of global financial markets and the potential for rapid, large-scale market movements in response to policy changes and investor sentiment.
